No, Washington Does Not Have a Nat Gas Weapon Against Moscow

After Russia’s invasion of Ukraine and its occupation of Crimea, many in the West wondered what could be done to oppose Moscow. Complicating matters, Europe depends on Russia for over thirty percent of its natural gas supply, and Moscow has used this leverage before to extract political concessions. Even now, Gazprom, the Russian gas behemoth, has threatened to cut exports to Ukraine should it fail to pay its gas debt. To many, the answer to the specter of Russian natural gas dominance is clear: unleash America’s natural gas abundance and displace Moscow.

This sentiment was crystalized in an op-ed penned by John Boehner in the Wall Street Journal last week, which called on President Obama and the Department of Energy to accelerate LNG export terminal approvals and open up America’s vast natural gas supplies to export. Boehner claimed that not only can the United States match Russia in the European energy marketplace—it has an obligation to do so. The question is whether or not this would work. Would American natural gas exports help shift the European balance of power?

While there is an argument to be made that crude oil exports or even coal exports could immediately dampen Moscow’s regional clout, natural gas exports cannot tip the geopolitical energy scales in Washington’s favour anytime soon.

Most of the natural gas that could potentially head for Europe is already committed in long-term supply contracts. The reasons for this are financial. Building an LNG export facility is a multi-billion dollar endeavour, and financiers want to be sure that future revenue is guaranteed, at least until the debts are paid off. This necessitates long-term contracts between LNG exporters and LNG import facilities at the other end. This means that even once American LNG exports are booming, little of that gas could be rerouted in a surge to offset Russian supply.

Furthermore, most of those contracts are in Asia, where natural gas prices are higher than in Europe. The United States does not sell natural gas, nor does Europe buy it; commercial entities do, and these companies are not going to voluntarily lose money in order to advance American interests. As Michael Levi explains, the U.S. government “can create a framework in which commercial entities can sell gas, but after that, it’s up to those businesses to decide where the gas goes.” Moreover, those businesses will likely sell the gas where they will get the greatest return. Landed LNG prices in Europe range between $10 and $11 per MMBtu, while the price in Asia is $15 or higher. Also consider that the liquefaction process adds between $4 and $6 to the price of natural gas, and that the Henry Hub spot price, the benchmark for American natural gas, spiked to over $7 per MMBtu in the beginning of March on the back of an abnormally cold winter. At these prices, it would be hard for American producers to compete with European prices even if they wanted to.Washington cannot wield natural gas as a tool of statecraft in the same way Moscow can. The private companies that make the United States so dynamic also make it far more beholden to prevailing market realities, and the reality is that when American companies begin exporting natural gas, very little of it will be destined for Europe.

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Good article. Thanks for pointing out a few facts. At the same time that Rand Paul is calling for increased drilling to counter the Russians gas weapon I saw a headline that 35% of the gas being produced in the Balken is being flared.
And another thing. Approximately one-half of all rigs working in the world are working in the U.S. (Baker Hughes Rig Count). Just where do this talkers think we are going to get more rigs and all the workers it takes to drill. Oh, and the water.

decent on March 12 2014 said:

Other reality for european natural gas buying companies is that with russian gas you never know when supply will be disrupted.

bob on March 12 2014 said:

Good article, but recall that Poland and Germany hold excellent prospects from fracking industry.